Outsourcing has been an important strategy for many industries for over two decades. It has become very prominent recently and has attracted both good and bad publicity due to the staggering rise in outsourcing of IT functions. But the fact is that companies in different areas of operations have practiced outsourcing for a long time. Automotive companies are a good example.

Most reduction and focus on core areas are two main drivers that force a company to think of an outsourcing strategy. Once a company gets into the outsourcing mode and succeeds in its goals, a chain reaction starts. The outsourcing trend grows mainly through this chain reaction!

Other companies must now match competitors in their outsourcing endeavors to achieve cost competitive growth. Companies are forced to maintain the lowest possible cost structures and simultaneously to meet world-class standards. The traditional business model where one company did everything in-house doesn't work any more.

Though this trend has become very visible in recent years, there are many hurdles to cross before a company can effectively integrate an outsourcing strategy into its business. The most obvious of these hurdles is the necessary mechanism that will allow companies looking to outsource work to meet the right vendors looking to take up the outsourced work. The right solution to achieve this is the key to success.

What outsourcing is all about?
The Institute for Supply Management defines outsourcing as "A version of the make-or-buy decision in which an organization elects to purchase an item that previously was made or a service that was performed in-house; often utilized for services. It involves sourcing and using a supplier that provides the completed item or service rather than buying the components and manufacturing them in-house."

Initially the outsourcing trend in the USA started by outsourcing within the country itself, to regions with low-cost labour. The logical extension of this process was outsourcing to low-cost countries rather than to low-cost areas within the own country.

Improved financial performance is the most basic goal for outsourcing. But it is not so simple to play the game. There are many pitfalls on both sides.

Loss of control and underperformance by the new suppliers can be quite harmful to the outsourcing process. On the other hand, the supplier taking up the outsourced work may find it very difficult to meet the buyers' requirements of design, quality and commitment to delivery schedule.

The infrastructure required to meet the expectations of the buyer may become a bottleneck for the supplier. A low-cost supplier from a low-cost country may not always afford to build his own infrastructure, which may need an investment running into millions of Dollars.

Establishing a viable strategy
To establish a viable long-term outsourcing strategy, companies must know what goods and services to outsource and must establish their expectations for outsourced suppliers very clearly. They must make sure that the chosen suppliers have the necessary capabilities for present and future requirements. The supplier performance must be closely tracked and corrected to achieve the long-term goals.

Three leading global companies in the fields of Procurement Solutions, Product Lifecycle Management (PLM), Information Technology and Engineering Services have realized this bottleneck that can make or break the outsourcing initiative by a company looking for suppliers from low-cost countries. AT Kearney - a leading global sourcing services firm, UGS - a leading global provider of product lifecycle management (PLM) software and services and Tata Consultancy Services - a leading information technology and engineering services organization have come together and launched 'Asian Sourcing Network' (ASN), an initiative designed to enable manufacturers to connect companies from low-cost countries to their global innovation networks.

Through the ASN center, the three companies will find, develop and integrate companies from low-cost Asian countries into the supplier-partner network. The manufacturers can electronically source engineered machine parts from these low-cost suppliers. ASN will provide companies with a local presence that is critical to the success of low-cost country sourcing activity.

One of the partners in the ASN initiative, AT Kearney has developed an 'Offshore Location Attractiveness Index' in which India tops the list in all three measures, namely – Financial Structure, Business Environment and People Skills and Availability. Naturally, the choice for setting up the first ASN center has been India.

The first ASN center has been set up at Coimbatore. About 180 small and medium enterprises in Coimbatore will now be linked to a global network of prospective customers, with the ASN playing an intermediary role between the global companies and Indian SMEs.

Enabling global innovation
Another partner, UGS has a grand vision of enabling Global Innovation Networks: "If you want your company to be a market leader, you need to innovate relentlessly. Today's most forward-thinking companies are building Global Innovation Networks that let you continuously improve your products and processes - and organize your value chain so that innovation can flourish. Global Innovation Networks unite global partners, suppliers and customers through a shared base of product/process knowledge. By allowing distributed value chains to innovate as a single enterprise, these networks drive today's crucial business imperatives like increasing the yield of innovation, compressing time to market, optimizing resources, meeting business and regulatory requirements and maximizing globalization advantages."

This kind of a solution will avoid duplication of efforts on the part of SMEs and also make it easy for the buyers to locate low-cost suppliers. As the SMEs will share the infrastructure provided by the ASN with about 50 engineers and high-end workstations with design applications running on them, they don't have to set up their own high cost infrastructure to achieve top class design innovation. This reduces the risk individual SMEs would have had to take in such a tricky business where one in four deals are likely to fail in absence of a highly methodical approach.

Combining the knowledgebase, experience, maturity and high global standing of the three partners in the ASN initiative, this unique solution is bound to bring about a new era in low-cost country sourcing, finding new, better ways of doing business to replace the old and making the most of the emerging global opportunities. With more ASN centers on the drawing board and Innovation Networks working in tandem with Sourcing Networks, export of engineered products from India is expected to grow to over $27 billion by 2010.

Ashok Dongre is an independent consultant, and can be reached at dongre@usa.net

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